How an annuity pool works | General financial discussion | Discussion forum

Loonie said

…Come to think of it, what happen if you buy an ordinary life annuity with no guaranteed payout, using your RIF? If you die in a year, most of the money would be in the hands of the insurance company. Are they somehow obliged to turn some of that over to CRA? It would only seem reasonable, but I ask because I simply don't know the answer.

That money becomes part of the annuity payments of the remaining surviving annuity holders of the particular annuity pool.

This overview at the end of this chapter excerpt (looks like from Chapter 1 of Annuities For Dummies published by Wiley) is a simplified explanation of how an annuity pool works:

Survivorship credits — the unique aspect of annuities

When you buy an annuity for lifetime income, you throw your money into a pool with money from thousands of other annuity owners your age. This is mortality pooling; …

With annuities, an insurance company puts the money into its own interest-bearing account or into a separate account where your money goes into subaccounts (mutual funds) that a professional fund manager oversees. All owners [of an annuity in the pool that account is for] then take an annual income from that pool.

Each month (or quarter, if you prefer) you receive a payment consisting of three elements:

• A little bit of your principal
• A bit of the pool’s investment growth
• A bit of the money left behind by fellow annuity owners who have died. This amount is your survivorship credit or mortality credit.

I guess once all the annuitants in a pool have passed away, what is left in the pool becomes extra business profit for the insurance company.

On the other hand, should the money in the pool run out before the last annuitant dies, then the insurance company would have to put money out of its own pocket into the pool for the payments. That money would be a business expense for the insurance company.